Cashless Nation

May 2015 marked a turning point in Britain’s spending habits. For the first time, there were a greater number of transactions made by electronic payment than by cash. Increasingly, we live in an era of digitisation.

But how exactly will we be paying for goods and services by 2020 and beyond? And what does this mean for physical notes and coins?

Over half of Britons believe that cash could soon become a thing of the past, according to research from credit-card firm MBNA in August 2015. Indeed, 40% of those polled claimed that they “never or rarely carry cash these days”.

So, what’s wrong with cash exactly?

Tony Craddock, director general of the Emerging Payments Association (EPA) says, “The trouble is it is actually quite expensive to retailers to handle, process and bank cash. And so does the retailer suffer from using cash? Yes and no. Yes, they pay for using cash. But the retailer just adds the cost of using cash onto the price of the product. So ultimately we all – as consumers – have to pay the cost of using cash.”

This view is echoed by Scott Abrahams, senior vice president of acceptance and emerging payments at MasterCard. “Well, number one, there’s just the whole management of cash. I used to work for a large supermarket, and one of my jobs there was looking after all the day’s cash. We would time how long it took us to manage cash at the point of sale. We would then have to count it. We would physically move it, and so on. There was just a huge amount of work involved.

“And there are obviously security concerns with cash. Also, when you look more globally, we see that high cash economies sometimes have a low growth rate, and issues such as corruption are much more endemic than they are in other countries.

“Our vision at MasterCard is a world beyond cash. So we see cash as our number one competitor globally. Obviously we have other competitors: Visa, Discover, AmEx, and so on. But our whole focus is on making payments electronic and removing cash wherever possible.”

Professor Bernardo Batiz-Lazo, ‎professor of business history and bank management at Bangor University, is keen to point out that cash transactions make up just a section of the money pyramid. “Can one of these payment organisations come along and conquer the world? Maybe. But they’re trying to solve a very small part of the puzzle with these on-the-spot transactions. In general people want choice, and there are a wide range of ways in which people can transact.”

Indeed, cash has long been displaced for our higher-value transactions. We make our mortgage or rent payments by Direct Debit or standing order. We make other large purchases on a credit card. But the growing competition for cash operates in the “last mile” – low-value, everyday transactions.

So could cash be supplanted in this space?

In the first study of its kind, MasterCard analysed 1.6 million conversations on social media regarding shopping and retail. It sought to discover which innovations motivated consumers to choose specific payments methods, and what matters most when choosing how to pay.

The MasterCard Retail Social Listening Study identified the three main things customers say they want when they pay. Customers want convenience, they want to be rewarded for their spending, and require widespread acceptance of their chosen method.

No one gets up in the morning and goes, "Yes! I'm going to make a payment!" But it's our job to obsess over that process, to make it as frictionless as possible.

Liam Spence

The study revealed, probably unsurprisingly, that “convenience was the most positively discussed aspect of new digital payment methods in shopping and retail related conversations (77%)”.

With no need for authentication per transaction, contactless is already one of most convenient ways to pay. And in September 2015, the upper limit on contactless transactions was raised from £20 to £30, allowing for a greater number of “pay by bonk” transactions still.

Phil Campbell is managing director of KERV, a company which has developed the world’s first contactless payment ring. This works by near-field communication (NFC), an increasingly common means of transferring data between devices in close proximity. In an industry striving for convenience, this obviates the need to even dip into one’s pocket.

“We’ve really gone for simplicity with it,” Campbell says. “With certain phone payment methods – whether it’s the HCE, the host card emulation, or whether it’s by other routes – you’ve always got to do something with the phone which is adding extra steps. And cards work pretty well, but they fill up your wallet, you’ve got to have lots of them…

“Our primary innovation has been reducing the ring’s size. There are products out there with Bluetooth and suchlike on them. But they’re really big and impractical. Just because it’s a piece of technology, doesn’t mean it has to be ugly. It needs to be fashionable.”

“We're very excited by wearables,” says Scott Abrahams, head of innovation at MasterCard. “We think that type of technology is something that’s easier to use. It’s at least as simple, safe and secure – and therefore a great alternative to – getting your wallet out and putting some cash down on the table.”

And convenience isn’t limited to the physical act of offering your payment. Any steps removed in the transfer of value are potentially beneficial for those making payments.

Liam Spence is head of innovation at Zapp. The company’s Pay by Bank app is a means of streamlining payments between users’ bank accounts and the retailer.

“This is the way that the industry is now turning,” he says. “New regulation is being designed to open up the finance and technology space – the EU Payment Services Directive (PSD2). So the information that’s held about you and your bank accounts can be accessed by other organisations, as long as you allow them to do that. The opening up of this industry is really interesting in terms of the amount of data that’s available.

“So an example of how that could benefit you as a consumer would be something like age verification. If you make an online payment for a product that’s age-related, then – because you’re making a payment from your bank app – your bank already knows how old you are. There’s no need for you to tick a box saying you’re over 18 to buy alcohol, or someone having to check that you've got some identification. The payment exchange includes extra information, and makes everyone’s life more convenient.”

In recent years, consumers in the UK have become used to the notion that they can spend smarter – that they can get a little bit extra just for the act of purchasing. Cashback incentives, points systems, loyalty discounts – rewards abound.

Vendors don’t tend to reward people for using cash though. Analogue rewards systems obviously still exist, such as stamps on loyalty cards. But these usually operate no matter how you pay – they’re not trying to encourage cash use.

Yet it's worth bearing in mind that, while using cash comes at a cost to the consumer, alternative payment methods aren’t free either. Some transactions may incur fees, as credit cards sometimes do at point of sale. In addition, rewards offered on debit and credit cards are likely to be squeezed, with caps on interchange fees coming into effect in December 2015. These fees are paid between banks for accepting card-based payments, and go some way towards funding customer rewards. At the time of writing, several rewards and cashback schemes have already been frozen.

Nonetheless, consumers want rewards, and innovators in payment are wise to this. Phil Campbell at KERV sees the potential benefit in integrating retailers’ loyalty schemes into the payment ring. “It will be a case of converting usage to points. We’re able to know that you’ve made a transaction at a retailer that participates in the loyalty scheme, and give points for your purchase. So on launch, it’s going to be our own loyalty program. But as we grow, we'd like to incorporate large merchants.”

When it comes to wearables, the UK is open for business.

Scott Abrahams

Widespread acceptance of payment methods is a must. Though many tout Bitcoin and cryptocurrency, we’re unlikely to see it being accepted at Aldi anytime soon.

Zapp’s Liam Spence is in agreement. “Even if a new technology provides huge benefits, the two building blocks that are critical for it to be accepted are scalability and ubiquity. Look at contactless payments for example. The first contactless payment in the UK was in 2007, and only now is it reaching scale.”

Professor Bernardo Batiz-Lazo identifies a problem with digital wallets in this regard. He gives an example of a lady who he saw crying at immigration in an airport, unable to retrieve her boarding pass. She couldn’t access the airport Wi-Fi, and was tapping desperately at her phone as the queue built behind her. Although many boarding passes are issued in PDF format, it still makes sense to print them out as backup.

And so it is with mobile payments. Coverage may be patchy. We often run out of battery. Cash may be an analogue fallback, but at least we know that it works.

Phil Campbell’s KERV payment ring, on the other hand, doesn’t require power. “From January 2016, all new terminals that are issued will be contactless-enabled. And then from 2020, all terminals must have converted into contactless-enabled. So acceptance is growing at a massive rate. And that’s being mandated by MasterCard and Visa.”

Scott Abrahams of MasterCard is also upbeat about adoption. “The most important thing with wearables in my opinion is that there are plenty of places you can use them in. And having such a large NFC contactless acceptance already in the UK gives us a great head start.

“Big retailers such as Tesco picking it up – and of course in London in particular Transport for London (TfL) opening up these types of payments – has meant a huge leap. We’re seeing an annual growth of around 560%. We work with a lot of retailers and issuers to help them distribute and accept contactless cards. So we see our average transaction value on our card portfolio is going down every year, which is good, because they're being used for lower and lower-value transactions.”

And this doesn’t stop at traditional retailers. “We see every connected device as a commerce device. Once it’s connected to the internet, you can use an electronic form of payment to transact with it.”

However, convenience, rewards and ubiquity aren’t the only challenges facing those developing payment methods. Abrahams continues, “We know that the way to beat cash and those other ways of paying is to make our way of paying the best, the most suitable, the most safe, the most secure, the most easy to use. And that's what our focus is on.”

Payment is all about identity. So being able to prove your identity in order to transfer value is the actual crux to making payments. And the company that absolutely nails the identity problem will be the one that wins in all payments.

Liam Spence

Payment methods need to be secure. It’s a fundamental to anyone choosing a payment method that their chances of being defrauded or otherwise making losses are minimised.

According to Scott Abrahams, “We strive on a minute-by-minute basis to make sure that whatever we’re doing is at least as safe and secure as it has been in the past. And actually much more so. This really comes down to two things, to my mind. One is making sure that the person trying to transact is the person they say they are. That’s really important.

“Here we get into biometric identification of people. If you think about it, Apple Pay is the great and probably first example of where the banks are using biometrics to formally identify people. When you put your thumb on the reader, that’s when you tell the bank ‘I am who I say I am’.”

Liam Spence has reservations concerning convenience. “I’ve been using Apple Pay recently. But to be honest, because you have to use your fingerprint to make the payment, authentication takes longer. The contactless NFC transaction itself is pretty quick. It’s just a handshake between the terminal and the phone. But the actual authentication itself takes 1.1 seconds, which if you’re going through a barrier on the tube, for example, has a big impact across all users.

“Using your phone, for example fingerprints on your iPhone or your Samsung S6, is a stepping stone in the right direction. But while biometrics is still perceived as quite cutting edge and innovative, I think it’s got a long way to go.”

In spite of such hurdles, it’s an area which is of great interest to Spence. “There’s a wristband available from a Canadian company called Nymi that can identify you based on your resting heartbeat. Halifax has been trialling that to log in to online banking using that information.” Such technology can go beyond payments, such as starting your car by recognition. It could potentially mean the end of all passwords and PINs.

“There’s also iris scanning, facial-recognition scanning, taking a selfie to authenticate the transaction... So there are some innovative and cool ways of transferring data and using biometrics to authenticate. Although they strive to be more convenient and more secure, I think no-one has actually hit the nail on the head just yet.”

Moving to different type of payment just creates a different type of fraud. The good guys are never going to win.

Professor Bernardo Batiz-Lazo

“The second area, which is as important, is that we continue to strive to keep the details, the information of those consumers safe,” Scott Abrahams says. Building trust among consumers is no mean feat, not least because security breaches make headlines.

Professor Bernardo Batiz-Lazo is cautious. “Moving to different type of payment just creates a different type of fraud. The good guys are never going to win.” He has concerns that malware is increasingly moving into the mobile space, and a serious attack may happen in future.

Yet the industry pushes on. An area seeing a good deal of investment is in tokenisation. Zapp’s Pay by Bank app relies on just such technology. Liam Spence explains, “The typical way to make an online payment today involves what we call a pull-payments. This involves giving away all your information to the retailer. They reach into your account and take the money out.

“That’s quite a bad way of making a payment really. Firstly it’s inconvenient giving away all your information. And secondly it’s insecure, especially in the online world.”

Push-payments differ in that only the payment information required to fulfil the order is made available to the retailer. So, for example, only the payment itself, and email or delivery address. Merchants don’t get to see the customer’s personal payment information itself.

“Because of that, we believe we’re going to eradicate first- and third-party fraud with payments using Zapp,” Spence continues.

“Another benefit is that it’s trusted by consumers, because it’s through their mobile banking app, and consumers trust their banking brands. All the research that we’ve done and I’ve seen external parties do has shown that consumers trust payments through their bank; not through a technology company, an MNO, or anyone else who wants to get involved. And so that trust factor is a big reason why they would use Pay by Bank app, as opposed to any other payment method.”

Tony Craddock, director general of the Emerging Payments Association, says, “Any payment has a security component. But new technology will go through the typical teething problems. As it settles down, it’ll be as secure as anything else. I think the perceived security risks are much greater than the actual ones.

“I call it the Ashley Madison effect.” In July 2015, a dating website targeting people seeking affairs was hacked, and their data was leaked. “As soon as you see what’s happened there with people's confidential information being made available – albeit nothing to do with payments security… That absolutely affects people’s likelihood to use and adopt new products, and I think it’s a concern the industry really has to manage very, very carefully.”

Here’s how I know I am using less cash. I have a mug in the bathroom. Every night I put my change in the mug. Normally, the amount I take out is about the same as the amount I put in. It’s currently overflowing because I don’t bother taking change with me.

Tony Craddock

We’re creatures of habit. Once we’re used to a certain behavioural pattern, it can be difficult to break. Much of our time is spent performing automatic functions that we don’t consciously think about, and making payments is no exception.

When it comes to changing the way people pay, a major hurdle innovators face is whether to piggy-back on current user behaviour, or essentially try to retrain the user.

Liam Spence, head of innovation at Zapp, is well aware of this. “I think apathy is the main barrier to changing consumer behaviour. We know that consumers are used to reaching for notes and coins in their pockets or wallet. These are entrenched behaviours and deep habits. Their brain doesn't even register what they're doing.

“Our Pay by Bank app provides some great reasons to ditch cash and use their phones. However, we know it’s a difficult barrier to overcome. While for millennials and digital natives it’s less of a barrier – because they reach to their phone for everything – for Gen X and baby boomer generations this provides a challenge to the industry.

“At point of sale, when you’re using contactless, taking your card out of your wallet and tapping is really straightforward and really easy. So you need a reason for consumers to adopt the mobile method.”

But even for those who have yet to adopt, the phone seems to be the natural successor to the wallet. “When we speak to consumers about what they want from payments, it’s the general perception that using a phone for everything is coming. Your phone is your remote control for your life, and that can include payment interactions.”

Nerys Lewis, head of credit cards at Confused.com, says, “I use a contactless card when I can. It’s quicker than using cash, but is essentially the same mechanism – I’m reaching into my purse for something. I started using an NFC wearable, but abandoned it after a few days. I wasn’t buying enough things to justify wearing it every day. Plus I was having to teach myself a new habit, whereas with getting out my purse, that habit is already formed.”

Tony Craddock at the EPA echoes this. “At a wearables seminar, I asked the guys on the panel two questions. The first: ‘What's your predicted percentage of all transactions that will be going through wearables in 10 years’ time?’ And they varied from 10% to 50%. I think it’s more likely to be 10%. The second question was, ‘Of the five of you on the panel, how many of you are carrying or wearing a wearables device?’ And not one of them was. So they were predicting this wave of adoption, but they actually weren’t adopting themselves.

“There’s something psychological about the give and take. If I go into a shop and I come out having done nothing other than just wave my watch at somebody, then it takes some getting used to.”

In the digital world you have success or error, ones and zeroes. With an analogue payment like cash, you have shades of grey.

Professor Bernardo Batiz-Lazo

When it comes to the question of whether we’ll go cashless in the foreseeable future, Professor Bernardo Batiz-Lazo of Bangor University is deeply sceptical. He believes that alternatives to cash is an atomised field, where no-one has yet discovered a truly compelling proposition.

“All legacy infrastructure may be inefficient, but it’s stable. Think of the ATM. It took 15 to 20 years to take off. And it’s 40 years and still going. Even in the late 19th century, there was a movement in France to get rid of banknotes in favour of personal cheques, to solve this problem of small change. Cheques were popular in England in the early 19th century. And here we are two centuries later, and we still have them.”

“The payment card industry, such as Visa and MasterCard, has long been heralding the death of cash. But we need to be really careful what we tell consumers, because we’re in charge of looking after their money – which is a really important aspect of their lives, obviously. Therefore if we’re telling them something that doesn’t happen, then how does that reflect on us as an industry? We need to understand the message that we're giving out.”

Even MasterCard’s Scott Abrahams, who champions a world without cash, concedes it’s unlikely to die out anytime soon. “The only way you get rid of cash is you get rid of it totally. A lot of the savings and benefits of not having cash are only fully realised when you don't accept it at all. So until a till doesn't have to have a cash drawer, there’ll still be a huge amount of fixed cost in transacting with cash. But there will always be a hardcore of people – albeit dwindling – that want to use cash.”

There’s also the social aspect to cash to consider. How is it possible to digitally replicate the feeling a child gets when they get cash in their birthday card? What would one cast into a fountain while making a wish, or use to make 50-50 decisions? An app simulating the toss of a coin just isn’t the same. There are innumerable ways in which notes and coins permeate through society.

With so many different stakeholders, it seems as though online predictions of a cashless society are overegged. Even in businesses in competition with cash, only its primary adversaries – such as MasterCard – seem to see it dying out within a generation.

And not everyone in the industry wants it gone. An unexpected allegiance comes in the form of Tony Craddock, director general of the Emerging Payments Association. “Cash will diminish in terms of the frequency in which people use it. But also, sometimes cash is brilliant. I’m a bit of a fan of cash.”

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